By the Numbers

Know your CLO overlap ratio for better risk diversification

Caroline Chen | January 26, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Two CLO managers holding loans from the same issuer create an overlapping credit exposure, leaving their loan portfolio performance a little more correlated. A range of factors influence overlap including the mix of available loans, the managers’ allocation or trading strategies, the timing of deal ramp-up and issuance and the managers’ mix of reinvesting and amortizing CLOs. This applies to overlap across all loans, of course, and to overlap within the ‘CCC’ and lower-rated loans. Investors that want to diversity exposure to any CLO credit pressures should know their managers’ ‘CCC’ overlap especially.

The ‘CCC’ overlap ratio measures two managers’ overlapping exposure within just the ‘CCC’ and lower-rated portion of their portfolios. An example of this calculation is in Appendix I. The higher the number the greater the overlap. Two managers with no ‘CCC’ loans in common would have a ratio of 0%, and two with equal amounts and all ‘CCC’ loans in common would have a ratio of 100%.

While many CLO managers have considerable ‘CCC’ or lower-rated loans in their portfolios today, managers’ overlap ratio, on a median basis, remains low at 15% (Exhibit 1). This may bring some comfort to investors. There is a slight tendency for managers with large amounts of ‘CCC’ loans to have a greater ‘CCC’ overlap ratio with peers.

Exhibit 1: Managers’ overlap exposure to credit-weak issuers overall stays low

Notes: The data comprises 96 broadly syndicated loan (BSL) CLO managers. Managers’ exposure to S&P ‘CCC’ or lower rated loans represents the par balance of ‘CCC’ or lower-rated loans in a manager’s outstanding CLOs relative to the total collateral balance. Each manager has an overlap ratio with 95 peer managers. The dot represents the median of a manager’s 95 overlap ratios. CLO performance updates through Jan 11, 2024.
Source: INTEX, Santander US Capital Markets LLC

Managers’ overlap exposure to credit-weak issuers comes with wide dispersion

Most managers’ overlap ratios for ‘CCC’ or lower-rated issuers are in the mid-teens today. However, their overlap is widely dispersed (Exhibit 2). For example, PineBridge has a median overlap ratio of 15.6% with all peer managers, ranging from 0.6% with Anglo, Gordon to 40.4% with ORIX Advisers. Of the 96 managers in the analysis, the lower ‘CCC’ overlap ratio between two managers is often less than 1% while the higher overlap exceeds 40%.

Exhibit 2: Managers’ overlap exposure to credit-weak issuers is widely dispersed

Notes: The data comprises 96 broadly syndicated loan (BSL) CLO managers. CLO performance updates through Jan 11, 2024.
Source: INTEX, Santander US Capital Markets LLC

Large managers have a greater overlap with each other on credit-weak issuers

The ‘CCC’ overlap ratios amongst managers with at least $15 billion in BSL CLO assets are mostly higher than the mid-teens (Exhibit 3). Of those large managers, CSAM has the smallest ‘overlap with peers, with a median of 16%, ranging from 8% with Palmer Square to 27% with Carlyle. In contrast, Sound Point has the most overlap with all large managers on a median basis, and a high of 43% with Octagon. In addition, both Sound Point and Octagon’s portfolios comprise ‘CCC’ or lower-rated loans, which are higher than peers’ current median. Investors may also take note of KKR and Ares, which both have large amounts of ‘CCC’ or lower-rated loans in their portfolios, with an overlap ratio of 38%.

Exhibit 3: The overlap of ‘CCC’ or lower-rated issuers between large managers is higher

Notes: Current ‘CCC’ (%) represents managers’ aggregated S&P ‘CCC’ or lower rated loans in their outstanding CLOs relative to the collateral par balance. NB=Neuberger Berman; Carlyle’s data includes deals managed by CBAM; Apollo’s data include deals managed by Redding Ridge only. CLOs managed by Alcentra are reported separately, not included in Benefit Street. CLOs managed by Denali are reported separately, not included in Ares. CLO performance updates through Jan 11, 2024.
Source: INTEX, Santander US Capital Markets, LLC

Large managers have lower overlap with small rivals, with a few exceptions

Managers with less than $5 billion in BSL CLO assets have a median of 7.4% ‘CCC’ or lower-rated loans in their portfolios, which is about 50 bp higher than their large rivals. But large managers have less ‘CCC’ overlap with their small peers (Exhibit 4). There are a few exceptions. For example, MJX has a 30% overlap with Nassau Credit and Palmer Square has a 31% overlap with Angelo, Gordon. It is worth noting again that CSAM has the lowest overlap ratio with all small managers.

Exhibit 4: Small managers have higher ‘CCC’ exposure, but lower overlap with larger rivals

Notes: Current ‘CCC’ (%) represents managers’ aggregated S&P ‘CCC’ or lower rated loans in their outstanding CLOs relative to the collateral par balance. NCC= Nassau Credit Corp. Carlyle’s data includes deals managed by CBAM; Apollo’s data include deals managed by Redding Ridge only. CLOs managed by Alcentra are reported separately, not included in Benefit Street. CLOs managed by Denali are reported separately, not included in Ares. CLO performance updates through Jan 11, 2024.
Source: INTEX, Santander US Capital Markets, LLC

In 2023, S&P downgraded 91 ‘B-‘ issuers in BSL CLOs to ‘CCC’ or lower ratings, and the total number of issuer downgrades in BSL CLOs was 1.7x more than upgrades. While the CLO market started the new year with broad optimism, investors may need to keep an eye on managers’ overlap exposure to weak names.

Appendix I: An Example of the Overlap Ratio Calculation

Deal performance updates through Jan 11, 2024.
Data source: INTEX, Santander US Capital Markets LLC

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.